Pre Contract Cost Planning by Lahiru Dananjaya Paranamana

BE 2405 – Construction Economics III Pre-contract costing

Acknowledgement

This report reflects the combined efforts of many professionals in the University of Moratuwa. Their

observations, conclusions, recommendations, are a product of intensive investigation upon us. Those

became as precious assets to achieve the task of our project. So many people deserve credit, which is

impossible to identify all of them individually.

Mr. B.V. Prasath Sanjeewa, senior lecturers of the department of building Economics contributed skills

and their dedication was made our project success. A project like this, necessasarily required the

assistance of many people. H.A.E.C. Jayasena has assigned us to reach the task in a flexible manner. The

lecturers in charge of computer labs helped and guided us to obtain knowledge by providing the facilities

to access internet to collect information for our project work.

Here this project work is acknowledged to the Department of building Economics in the University of

Moratuwa as to show our gratitude to above professionals and future professionals. Your acceptation will

be courage to our career in this field of Quantity Surveying and Facilities Management.

Department of Building Economics


Table of Content

1.0 Introduction..............................................................................................................................................1

2.0 Pre-contract cost planning........................................................................................................................2

2.1 Types of Cost plans produced in different stages................................................................................2

3.0 Pre-contract cost planning process in the RIBA plan of work.................................................................3

3.1 Feasibility Studies................................................................................................................................3

3.2 Outline Proposal..................................................................................................................................5

3.3 Scheme Design Stage...........................................................................................................................7

3.4 Detail Design to Production Information stage...................................................................................8

3.5 Bill of Quantities stage and Documentation........................................................................................8

4.0 Preliminary Estimating techniques used in stages of RIBA plan............................................................9

5.0 Pre-contract cost controlling..................................................................................................................11

5.1 Basic Principles of cost controlling...................................................................................................11

6.0 Pre-contract cost controlling process in the RIBA plan of work...........................................................12

7.0 Pre construction cost control line diagram.............................................................................................14

8.0 Pre-contract cost control flow chart.......................................................................................................15

9.0 Conclusion.............................................................................................................................................16

10.0 References............................................................................................................................................17



1.0 Introduction

The cost of a project should be predetermined before the implementation of the construction due to the

scarcity of investments in the project, so the client requires knowing the cost of construction which fulfills

his design and other functional, structural and aesthetical requirements.

The objectives of this report are to set out the procedures which are necessary to enable a chartered

quantity surveyor to carry out comprehensive pre-contract cost plan and control for a proposed project

from the formulation of the client’s brief, through the various design stages until a contractor’s tender is

finally accepted.

Pre-contract cost planning and cost controlling are processes which go together, in other words pre-

contact cost planning cannot sustain alone without pre-contract cost controlling or vice versa. Cost control

and planning during the construction process is fundamental to ensure the success of a project. The most

complex projects share the common theme that they are fraught with risks and uncertainty that can cause

cost escalations, cost control is the process of controlling of cost performance against the cost plan,

adjusting one or the other reference to the changing circumstances in the project's financial environment.

This is a process that should be continued throughout the construction period to ensure that the final cost

of a building project within the target cost. The cost control can be divided into three major areas, they are

during the design stage, during the tendering stage and after the construction commencement controlling

is done by the client.

Ideally, cost control should be provided from inception to completion of the project. Such that the

estimated final cost of project is always known. However, Pre-contract cost controlling is quite different

to the post-contract cost controlling. So to identify the function plays in pre contract stage is detailed

throughout this report and the illustration of diagrams will enhance the understandability of how the

planning and estimating is provided under these stages in the RIBA plan of work.

This course work contains about pre contract cost planning and cost control related with the RIBA plan of

work and estimating techniques used in the cost planning process and cost controlling which is an

essential part of cost planning. As quantity Surveyors, it is essential to have the idea of estimating prior to

the preparation of the Bill of Quantities and pricing its items, which is given the overall idea and the

estimating acts as a reference to the Bill of Quantities.



2.0 Pre-contract cost planning

Pre-contract cost planning is the technique by which the budget is allocated to the various elements of an

intended building project to provide the design team with a balanced cost framework within which to

produce a successful design. It should be a continuous process; progressive checks are being made from

time to time in relatively more detail on perhaps smaller sections of the project as the designed is

finalized.

A general principle applies throughout the cost planning process that any agreed budget or cost limit is

seen as the maximum cost, and the quantity surveyor should at all times work with the design team to

satisfy the client at a lower cost if possible. If at any time sums have been included in the approved

budget for site abnormal costs, for example, which subsequently are found to have been wholly or

partially unnecessary, the consequential saving should always be notified to the client.

2.1 Types of Cost plans produced in different stages

1. Sketch Design Cost Plan

2. Interim Cost Plan - This cost plan is not to be provided unless specifically requested. It is envisaged

that it will be required when there has been a significant change in the design.

3. Tender Document Cost Plan

Cost plans are to reflect building price which includes market conditions. Target dates for the cost plans

are to be decided upon between the Project Team Leader and the project team in accordance with the

requirements of each particular project. The cost plan should not be prepared with a list of exclusions. If

the cost information is not available, the project team leader must be informed and an allowance

determined and included in the specific element. All factors must be included. If it is considered that an

allowance is at particular risk, attention should be drawn to this fact.

The interim cost plan and tender document cost plan are to include a reconciliation statement comparing

individual element totals, areas etc. with those in the previous cost plan. All difference are to be fully

reconciled.

In the early cost planning stages a design contingency allowance shall be included equating with the

amount of detail available. The purpose of this contingency is to cover any variable cost factors other than

inflation or major changes required by the client authority. The extent of the design contingency

allowance shall be clearly shown. A contract contingency allowance shall be included if necessary.



3.0 Pre-contract cost planning process in the RIBA plan of work

3.1 Feasibility Studies

Definition

At this stage Quantity surveyor should determine, whether the total expenditure authorized by the client

which is within the responsibility of the design team.

Objectives

1. To establish the limit of expenditure necessary to meet client’s requirements set out in the brief.

2. To provide the client with a statement of the likely area and quality of building which can be achieved

within the limit of expenditure, and of the recommended methods of contractual procedures necessary to

achieve the required occupation date.

3. To provide the client with the alternative budgets for different completion dates and the quality of the

building.

Information requirement

The basic requirements from the client and members of the design team to the quantity surveyor

From the Client 1. Location of the site; the availability of the site for commencement of the

construction.

2. In conjunction with the architecture, a schedule of accommodation.

3. Names of similar buildings of broadly suitable quality.

4. The required occupation dates.

5. Any specific requirements relating to life cycle of costs.

6. Any specific requirements as to specification.

7. Requirement in respect of inflation.

From the Architect 1. Approximate location of the building on the site.

2. Advice on minimum storey height for specialist areas on schedule of

accommodation.

3. Advice on likely planning conditions

4. Advice on likely Fire regulations

5. Advice on routes of public sewers etc.

6. Architects concept of building.

7. Names of previous similar projects designed by the practice.



From the services

engineer

1. Advice on areas of building which will require specialist engineering services.

2. Advice on availability of public utility services.

From the structural

engineer

1. Advice on probable ground conditions.

2. Advice on probable floor loading.

The information from the quantity surveyor to design team members

To the client 1. The budget, with alternatives if appropriate.

2. A statement of the basis of the budget calculation including any important

assumptions made.

3. A statement setting out the time for design and construction which the budget

cost will meet.

4. Cash flow forecast.

5. A statement of items not included.

To the architect 1. A copy of document sent to the client.

2. A more detailed statement of quantity and quality parameters included in the

calculation.

To other

consultants

1. Such quality and quantity parameters as relate to their area of design.

Method of preparation

The method of preparation will depend on the type of project involved. Unusual projects, projects of great

complexity and projects containing large element of alterations cannot normally be accurately budgeted at

an early stage. For many other types of projects, it is possible to build up a budget using the parameters

set out. The main elemental quantities of hypothetical buildings can be easily generated using agreed

parameters, to which rates applicable to agreed quality and performance standard can be applied. Once

the budget has been calculated in this way it provides the first cost plan for the project, and therefore the

framework for the actual design to develop

Inflation

The prediction of future inflation may not be necessary for some clients, and a statement of cost at current

prices may be adequate. Where an assessment of inflation is required for more than a few months ahead, a

range of probable inflation is best provided. This can be computed using predictions published by the

BCIS, Architects Journal or the PSA projections. The assumptions upon which the prediction is made

may need to be stated. Some public sector clients have their own rates, sometimes they are unrealistically

low, and in such circumstances professional judgment is exercised.



3.2 Outline Proposal

Definition

A statement of the cost of an intended design at the outline proposal stage which details the cost targets

for the main elements of the building, together with approximate quantity and quality parameters which

meet those targets.

Objectives

1. To describe, together with the outline proposal drawings, the chosen distribution of the resources made

available by the budget to provide a balanced design to meet the client’s needs.

2. To set cost targets for the main elements so that, as the design develops, the targets are checked and

adjustments made in order that the overall cost of the project is controlled within the budget.

3. To provide the whole design team with a control document which communicates the cost, quality and

quantity parameters which are to be followed.

4. To provide the opportunity for a preliminary consideration of life cycle costs.



From the Client 1. Confirmation of the budget, where alternative budgets were quoted in the

budget report the client must state his preferred alternative.

2. Confirmation of the design and construction time stated in the budget report.

3. Confirmation of the brief.

4. Acceptance of any other matters within the budget report, and authority to

proceed.

From the Architect 1. Outline drawings of the building and site works indicating alternative

solutions.

2. Indication of preferred specification for main elements.

From the services

engineer

1. Outline proposals of alternative structural solutions.

From the structural

engineer

1. Outline proposals.




To the client 1. A statement of cost

2. A broad indication of specification.

3. A statement of floor areas.

4. A request for decisions on any alternative proposals.

To the architect 1. A copy of documents sent to the client.

2. The cost plan.

To other

consultants

1. Such quality and quantity parameters as relate to their area of design and target

costs.

Methods of preparation

The method of preparation will either be by the measurement of approximate quantities and the

application of rates to the quantities generated, or from comparison of the requirements with analyses of

previous projects of a similar character. Evaluation should be made of the alternative forms of the

construction of the key elements. The key elements always vary and it is anticipated that major financial

consequences almost always include structural and services elements.

Design and Construction Period

In establishing the outline cost plan, the quantity surveyor must take into account the consequences of the

proposals made by the other members, because when the completion dates are critical, the selection of

components or systems should be made with a view to there being acceptable alternatives in case of speed

up the construction.

Inflation

Where the client has been given a forward projection of inflation and where this prediction is significantly

changed, it should be reported periodically.



3.3 Scheme Design Stage

Definition

A statement of the cost of a selected design at the scheme design stage, which details the targets for all the

elements of a building, together with the quantity and quality parameters described by the scheme

drawings and specifications.

Objectives

1. To set out for the design team the actual distribution of resources described by the scheme design.

2. To set cost targets for all elements so that as the detail design develops, the targets are checked and

adjustments made in order that the overall cost of the project is controlled within the budget.

3. To provide the whole design team with a control document which describes, in detail, the cost, quantity

and quality parameters which have been adopted.



From the Client 1. Confirmation that the cost plan prepared at the outline stage is acceptable.

2. Confirmation of the brief.

3. Indication of any preferred alternatives given in a previous cost plan.

4. Acceptance of any other matters within the previous cost plan report, and

authority to proceed.

From the Architect 1. Scheme drawings and scheme specifications.

From the services

engineer

1. Scheme drawings and scheme specifications.

2. Detailed design parameters.

From the structural

engineer


2. Confirmation on floor loading and the like.

3. Provisional indication of weights where appropriate.

From the specialist

consultants





To the client 1. A statement of the cost.

2. A statement of the specification.

3. A statement of the floor areas.

4. A statement of the proposed design and construction programme.

5. A cash flow forecast, where appropriate.

6. A statement of the relevant life cycle cost where appropriate.

To the architect 1. A copy of documents sent to the client.

2. The cost plan.

To other

consultants

1. Such quality and quantity parameters as relate to their area of design and their

target costs.

Methods of Preparation

The method of preparation should normally be by measurement of approximate quantities from the

proposed scheme drawings. The degree of detail to be measured should be related to the cost significance

of the elements in the particular design. Likewise pricing should be similarly related. Some elements may

still be most suitably priced on an elemental unit rate basis, where the cost significance is low. Major

elements will normally need to be priced in greater detail.

The preliminary engineering and specialist services scheme drawings and outline specification notes will

be required from the consulting engineers, from which approximate quantities of equipment can be

measured and priced using all-in rates. Pipe work and cables will normally still need to be priced on an

overall basis related to floor area or service points at this stage. This also ensures that the likely builders

work implications are understood by the design team and costs are taken into account

3.4 Detail Design to Production Information stage

The review of cost plan is done at this stage. Mainly the process of the cost checking is done to modify

the cost plan. (Refer conjunction with cost controlling at this stage.)

3.5 Bill of Quantities stage and Documentation

The final tender cost plan is prepared for the project by pricing all the BOQ items, using of the finalized

drawings and specifications. (Refer conjunction with cost controlling at this stage.)



4.0 Preliminary Estimating techniques used in stages of RIBA plan

Stages Preliminary Estimating techniques

Inception and

feasibility Stage

1. Conference Estimating

Used for the preparation of earliest price estimate given to the client

Based on consensus view point

2. Financial methods

Used to determine cost limits or the building costs in a developer’s budget.

3. Unit method

No need of drawings and specifications.

Only the concept of the project in respect of function is required.

Only required historical data and the experience of the estimator in adjusting those

historic data to the current figures.

Estimate = Standard units of accommodation x Cost per unit

Scheme design

Stage

4. Cube method

This method needs some of sketch drawings, purpose and function of the project.

Required the historical cost data and experience of the estimator is required.

This method is base on relationship between building volume and unit cost.

Estimate = volume of the building x Unit cost (cost/m3)

5. Superficial area method

Requirements are as above.

This method is based on relationship between building Area and unit cost

(cost/m2).

Estimate = Area of the building x Unit cost (cost/m2)

6. Story enclosure unit method

Requirements are as above.

This technique use weightings for the estimating the building elements.

Detail Design

Stage

7. Elemental Cost estimating

Detail drawings are required

The method analyses the cost on an elemental basis.

Attempting the use of cost data of similar projects.

Production

Information

Stage



8. Approximate Cost estimating

Detail drawings are required

Taking off is done for composite items by grouping together typically bill-

measured items.

Relates to the cost of actual work

Bill of

Quantities Stage

Resource analysis

To determine individual rates for measured items in the Bill of Quantities.

Considering each items by analyzing of material , labour and plant and equipment

requirement.



5.0 Pre-contract cost controlling

Pre-contract cost control is the total process which ensures that the contract sum is within the clients

approved budget or cost limit. As the design is developed and decisions taken the cost plan must be

checked to ensure that such decisions will not adversely affect the intended expenditure. If the value of

any element in the cost plan is seriously altered by a decision taken at this stage it will be necessary to

review the value of other elements in the cost plan.

A construction cost control system should enable a manager to observe current cost levels, compare them

with a standard plan or norm, and institute corrective action to keep cost within acceptable bounds.

5.1 Basic Principles of cost controlling

Principles Description

Frame of

reference

(cost limit)

Establish a realistic cost estimate and determine how the money is going to be spending

between elements of the construction. Generally, this realistic cost estimate will be with

acceptable contract price.

Method of

checking

(cost target)

As the work progress, Cost targets are checked as the design advances. The cost planner,

in conjunction with all members of the design team, must detect and measure variances

from the cost targets previously established.

Means of

remedial

action

(cost check)

This is to ensure that the expenditure is contain with the cost targets (cost limits).

Remedial actions should take after the discussion with design team and the management/

client. The remedial action should take well before the stage where any damages done

cannot be change back to the original budget. Therefore, this action should take before

preparation of production information and Bills of Quantities.



6.0 Pre-contract cost controlling process in the RIBA plan of work

Stage Cost control

Feasibility

Studies

If at any time during the design process it becomes apparent that the agreed budget is

likely to be exceeded, without a change to the brief, the client should be informed and

instructions requested. Likewise, if it becomes apparent that the whole of the agreed

budget will not be required, the client should also be informed.

Outline

Proposal

Stage, and

Scheme

Design Stage

When a change is proposed to the outline cost plan the following procedures should be

followed;

All the relevant members of the design team should be informed.

The architect should confirm his agreement, in principle, to the proposal.

No proposal should be incorporated in the cost plan without the agreement of the

quantity surveyor, and he should indicate his confirmation that the proposal can be met

within the agreed elemental target.

Where the proposal incurs additional cost over the elemental target, or would cause the

total budget to be exceeded, the quantity surveyor should positively indicate to the

design team alternative savings that are available to maintain the overall budget.

Upon the conclusion of a proposed change, the quantity surveyor should communicate

to the client, and all members of the design team, the consequential effects of the

change and provide an updated cost plan.

The quantity surveyor should take into account, when considering the proposed

change, the likely effect on the design and the construction programme.

In all considerations of alternative cost proposals, the use of consultants for additional

work should take into account any consequential addition to professional fees. In

particular, this applies to consulting engineers, whose fees are calculated only on

specific parts of the project.

Detail Design

to Production

Information

stage

Objectives

To allow flexibility in the design process for change of mind, whilst maintaining

overall cost control of the project within the framework of the cost plan

To reduce the amount of abortive design work and lost time caused through proceeding

too far in the design process before realizing that the budget will be exceeded.

Principles

The method will vary according to the stage reached in the design process. Normally,



however, this takes the form of measurement of approximate quantities from the

consultant’s drawings, to provide a check on the quantity and the quality of parameters

set down in the appropriate cost plan. The gross floor area is the first check at any

stage.

The two dominant considerations in deciding the priorities for cost checking elements

are as follows.

The cost significant of an element related to the total cost of the project.

The known variability of cost of an element i.e. where a wide range of cost is possible

in an element, it will be necessary to cost check this before checking elements of low

variability but of the same overall cost significance.

Judgment must be applied before notifying the architect of possible excess expenditure

in a particular element. If an excess revealed during cost checking is of such

significance that is highly improbable that compensating savings will occur elsewhere,

then this must be notified immediately and the design team must be asked to consider

modification to the cost plan. If, however, the excess or saving revealed in the element

is relatively small and there are still a number of elements to be checked, it is usually

more appropriate to advice the architect of the difference and to suggest that no further

action is taken until further cost checks have been carried out, since these may produce

compensating amounts.

It is important for the quantity surveyor to maintain proper records of the cost checking

process, setting down on a summary the value of the elements cost checked compared

with the cost plan targets, and to be especially clear as to the drawings or information

upon which the cost check has been based.

Bill of

Quantities

This stage will be the final check of cost controlling, which is giving the entire picture

of the project cost after the controlling the entire process.



7.0 Pre construction cost control line diagram



8.0 Pre-contract cost control flow chart


“Brief Stage Cost” Sets Initial Budget

Client Approval received?

Alter Brief

Cost Planning necessary?

Procedures as appropriate

YES

NO

YES

YES

NO

Outline proposals required?

NO

“Outline proposal cost” total comparisons of alternatives Client Approval

received?

YES

NOAmend Outline

Proposals

“Sketch Design Cost Plan” Includes estimates of alternatives during sketch design development and “Final Cost

Budget Document” if required

Client Approval received?

YES

NO Amend Sketch Design

“Tender Document Cost Plan” Includes cost checks during detail development

and production of tender documents, cost statements and interim cost plan if

required

Final Budget met?

NOAmend Tender

Document


9.0 Conclusion

The cost plays a vital role in the construction industry due to the fact that the client has a limited budget

so the work should within the range of the client’s budget to satisfy his requirements. Pre contract costing

flows from the inception to the documentation in the process of RIBA plan of work. Planning should go

in conjunction with controlling to conclude on realistic cost plan of the project. It always updates at the

presence of assumptions and the information available. Therefore the methods used in the preparation of

estimate also moderate as it flows in the process. Cost plan develop with the client’s brief with an

unknown design and ends up with the priced bill of quantities where the summary in it give the final cost

estimate of the construction at the consultant’s point of view.

Estimating techniques could not help the design team to prepare a realistic estimate for a client at the

early stage of the building design. It results to develop preliminary estimating techniques. The techniques

used in the pre contract cost planning which is detailed in the project, is different and developed when the

design reaches step by another in the RIBA plan of work. The plan is mainly depend on the appropriate

technique used for the estimating and the estimator’s skills, knowledge and experience. For the required

adjustments for the quantity, quality and time, the estimator must use his professional judgment in

developing a realistic reasonable estimate prior to the implementation of the construction. Approximate

quantities and single rate methods are important and are the methods most frequently employed today in

both Cost planning and Cost controlling.

The cost control is the governing the accuracy and the reasonableness of the estimate throughout the

process. It is come across with certain principles that used to maintain the cost within the client’s budget

also conjunction with his required quality of the work. They are set up as cost limit, cost target and the

cost check, where the estimator will do a compare, analyze on variation and update the budget with some

other construction recommendation along with his scope.

The line diagram and the flow chart is given a symbolic presentation of the Pre contract costing of

planning and controlling as the overall picture of the report, It is highlighted where the estimator should

obtain the client’s approval to proceed with the work.

As quantity Surveyor undergraduates it requires to gain the knowledge on planning and controlling the

cost factor throughout the construction process.



10.0 References


Documents

Pre Contract Cost Planning by Lahiru Dananjaya Paranamana